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Business website costs: How to handle them for tax purposes

The business use of websites is widespread. But surprisingly, the IRS hasn’t yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs, and IRS guidance that applies to software costs, provide business taxpayers launching a website with some guidance as to the proper treatment of the costs.

Hardware or software?

Let’s start with the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2020, the maximum Sec. 179 deduction is $1.04 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2020 is $2.59 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Was the software developed internally?

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

Are you paying a third party?

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

What about before business begins?

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences. 

Need Help?

We can determine the appropriate treatment of website costs for federal income tax purposes. Contact us if you have questions or want more information.

© 2020

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Why face-to-face meetings with your auditor are important

Woman having video chat on laptop at at office

Remote audit procedures can help streamline the audit process and protect the parties from health risks during the COVID-19 crisis. However, seeing people can be essential when it comes to identifying and assessing fraud risks during a financial statement audit. Virtual face-to-face meetings can be the solution.

Asking questions

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Specific areas of inquiry under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit include:

  • Whether management has knowledge of any actual, suspected or alleged fraud,
  • Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
  • The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
  • Any specific fraud risks that management has identified or that have been brought to its attention, and
  • The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist.

In addition, auditors will inquire about management’s communications, if any, to those charged with governance about the management team’s process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Seeing is believing

Traditionally, auditors require in-person meetings with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal cues of dishonesty. In a face-to-face interview, the auditor can, for example, observe signs of stress on the part of the interviewee in responding to the question.

However, during the COVID-19 pandemic, in-person meetings may give rise to safety concerns, especially if either party is an older adult or has underlying medical conditions that increase the risk for severe illness from COVID-19 (or lives with a person who’s at high risk). In-person meetings with face masks also aren’t ideal from an audit perspective, because they can muffle speech and limit the interviewer’s ability to observe facial expressions.

A videoconference can help address both of these issues. Though some people may prefer the simplicity of telephone or audioconferences, the use of up-to-date videoconferencing technology can help retain the visual benefits of in-person interviews. For example, high-definition videoconferencing equipment can allow auditors to detect slight physical changes, such as smirks, eyerolls, wrinkled brows and even beads of sweat. These nonverbal cues may be critical to assessing an interviewee’s honesty and reliability.

Risky business

Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and ensuring your managers and accounting personnel are all familiar with how videoconferencing technology works. Contact us for more information.

© 2020

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2020 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Thursday, October 15

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

  • If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

  • Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

© 2020

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Levels of assurance: Choosing the right option for your business today

Three Closed Doors with Different Color in Front in the Room 3D Illustration, Choice Concept

The COVID-19 crisis is causing private companies to re-evaluate the type of financial statements they should generate for 2020. Some are considering downgrading to a lower level of assurance to reduce financial reporting costs — but a downgrade may compromise financial reporting quality and reliability. Others recognize the additional risks that work-from-home and COVID-19-related financial distress are causing, leading them to upgrade their assurance level to help prevent and detect potential fraud and financial misstatement schemes.

When deciding what’s appropriate for your company, it’s important to factor in the needs of creditors or investors, as well as the size, complexity and risk level of your organization. Some companies also worry that major changes to U.S. Generally Accepted Accounting Principles (GAAP) and federal tax laws in recent years may be overwhelming internal accounting personnel — and additional guidance from external accountants is a welcome resource for them to rely on while implementing the changes.

3 levels

In plain English, the term “assurance” refers to how confident (or assured) you are that your financial reports are reliable, timely and relevant. In order of increasing level of rigor, accountants generally offer three types of assurance services:

1. Compilations. These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). Instead, the CPA puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional and often omitted.

2. Reviews. Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with GAAP. Here, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. She or he inquires about these anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements always include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.

3. Audits. The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that your financial statements are free from material misstatement and conform with GAAP.

The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.

Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report.

Time for a change?

Not every business needs audited financial statements, and audits don’t guarantee against fraud or financial misstatement. But the higher the level of assurance you choose, the more confidence you’ll have that the financial statements fairly present your company’s performance.

© 2020

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Employers have questions and concerns about deferring employees’ Social Security taxes

The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.

The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.) 

Deferral basics

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.

For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022. 

Many employers opting out

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

How to proceed

Contact us if you have questions about the deferral and how to proceed at your business. 

© 2020

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Promoting and reporting diversity

Increasing diversity is a key initiative at many companies in 2020. This movement goes beyond social responsibility — it can lead to better-informed decision-making, improved productivity and enhanced value. Congress has also jumped on the diversity-and-inclusion bandwagon: Legislation is in the works that would require public companies to expand their disclosures about diversity.

Good for business

Even though it’s not reported on the balance sheet, an assembled workforce is one of your most valuable business assets. From the boardroom to the production line, people are essential to converting hard assets into revenue. However, the tone of any organization starts at the top, where key decisions are made.

Academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable for poor financial performance. This concept also extends to private companies: Management teams with people from diverse backgrounds and functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Bills to expand disclosures

The Securities and Exchange Commission (SEC) currently requires limited disclosures on boardroom diversity. Under current SEC rules, a public company must disclose whether and how it considers diversity in identifying board of director nominees. However, the rules don’t provide a definition of diversity.

In recent years, the SEC rules have been criticized for failing to provide useful information to investors. Critics want broader rules that provide more information about corporate board diversity.

In response, Congress is currently considering legislation to expand the SEC disclosure requirements. In November 2019, the House passed the Improving Corporate Governance Through Diversity Act. It would require public companies’ proxy materials to disclose additional diversity information on directors and board nominees.

The Senate introduced a similar bill in March 2020. In addition to expanding proxy statement disclosures, the Senate’s Diversity in Corporate Leadership Act would set up a diversity advisory group within the SEC to recommend ways to increase “gender, racial and ethnic diversity” on public company boards. The group would be tasked with studying strategies to improve diversity on boards of directors and would be required within nine months of its creation to report its findings and recommendations to the SEC, the Senate Banking Committee and the House Financial Services Committee.

In late July, a coalition of industry groups that included the American Bankers Association and U.S. Chamber of Commerce urged the Senate Banking Committee to pass the bill. “Our associations and members support efforts to increase gender, racial, and ethnic diversity on corporate boards of directors, as diversity has become increasingly important to institutional investors, pension funds, and other stakeholders,” the groups said.

Be a leader, not a follower

For now, Congressional legislation on diversity matters appears to have taken a backseat to more pressing matters related to the COVID-19 pandemic. In the meantime, many companies are planning to voluntarily expand their disclosures for 2020. We can help assess your level of boardroom or management team diversity — and provide cutting-edge disclosures that showcase your commitment to race, gender and ethnic diversity in the workplace.

© 2020

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Short Bits

SEC WHISTLEBLOWER REWARDS

Last April, The Securities and Exchange Commission (SEC) awarded more than $27 million to an individual whistleblower who alerted the agency to industry misconduct and provided critical investigative leads that advanced the investigation. This action saved the taxpayers millions of dollars. The SEC awarded $120 million to whistleblowers in 2019 alone. Since starting the program in 2012, the SEC has awarded approximately $425 million to 79 individuals for providing information on securities-related misconduct, corruption, and other criminal activity.

AMERICA’S SAVINGS CRISIS

Personal finance experts frequently recommend having three to six months’ living expenses set aside for the unexpected. But fewer than one in five – 18% – have six months’ expenses saved, according to the Bankrate 2019 Financial Security Index. A Federal Reserve study found that half of American households don’t have an emergency fund at all. And that was before the Coronavirus job losses. Today 25% of homeowners say they have less than $500 that they could access in case of an emergency, according to a June 2020 study by Homeserve.com.

WATCH THOSE CREDIT CARD BALANCES!

According to Experian, Baby Boomers (ages 55-73) and Silent Generation members (74 and older) lowered their balances by 1% in 2019. Meanwhile, younger generations have racked up higher balances. Generation Xers owe the most of all the age cohorts with average balances of $8,023 – an increase of 3% year-over-year. Millennial balances increased by 7%, to $4,702. Generation Z consumers have average balances of just $2,057, but that’s up 11% over last year.

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Question and Answer

QUESTION:

I own a small company and want to reward my employees during the holidays. What can I do for them without triggering a tax issue?

ANSWER:

All forms of compensation are subject to income tax unless specifically exempted. So items like gift cards, savings bonds, and gift certificates are all reportable as taxable income on the employee’s W-2. You’ll also need to do the appropriate withholding and pay payroll taxes on this money.

Follow the Rules
To completely avoid triggering any tax issues for your employees don’t gift cash and cash equivalents. Understand the de minimis rules which apply to gifts that are minor, of low value, infrequent, and administratively impracticable to track and report. Benefits that meet these requirements are generally not reportable as income.

The IRS does not identify any specific value as qualifying for de minimis treatment. Instead, the IRS looks at the overall nature of the gift, bonus, prize, or perk. Holiday gifts are generally okay if the value is so low that accounting for it is unreasonable or impracticable.

Bottom Line
You can probably provide a reasonable holiday dinner, lunch or party for your employees without reporting it as income – as long as it’s not a common or recurring event. The same goes for holiday gifts like flowers and gift baskets of modest value.

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Real Mortgage Costs

Well-qualified borrowers may be able to get some very low mortgage rates on both purchases and refinance transactions. But the interest rate is only one of the factors to consider before you sign:

PRIVATE MORTGAGE INSURANCE

If your down payment is less than 20%, you may have to pay private mortgage insurance. This will add thousands of dollars to the cost of the loan.

FIXED VS. ADJUSTABLE

When interest rates go up your adjustable payment will increase accordingly. Fixed mortgage payments remain steady.

CLOSING COSTS

Fees are inevitable. In some cases, the seller may be willing to cover some or all of these costs.

INSURANCE

You’ll need to cover homeowner’s insurance. And depending on location, you may also have flood, hurricane/windstorm, or earthquake insurance premiums.

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Open Enrollment Planning

Open enrollment is an important process that usually takes place November 1 through December 15. But for employers, planning starts much earlier. Planning ahead can result in savings, a smooth enrollment process and ensure you are offering benefits that help recruit and retain the best talent. Here are some tips for success:

EVALUATE BENEFITS

Look at the menu of benefits you currently offer. Research has shown that after health insurance, many employees value low-cost options such as flex time, more paid vacation days and work-from-home options.

KEEP IT SIMPLE

Assume most employees know little about health insurance and retirement plans. Educate them on the basics.

USE OF MULTIPLE MEDIUMS OF COMMUNICATION

Consider your employees’ age, education levels, English language skills and tech savvy. Then employ a combination of methods to get the word out. Don’t rely on technology alone. Supplement it with employee meetings, email, envelope stuffers, and direct mail.

START EARLY

Get your plans, benefits and options out to employees a month before open enrollment. This gives your workers time to discuss their benefits with their families.

REMIND EMPLOYEES

Tax changes can throw withholding out of whack, so remind your staff to check how much is being withheld from their checks.

COMMUNICATE YEAR-ROUND

Communicate the value of your employee benefits and wellness packages all year round. This will help employees to appreciate that this is part of their compensation.